2020 Year-End Reminders: Common Fringe Benefits, Rules for 2% S Corp Shareholders and Changes Under the Cares Act

As 2020 concludes, employers should carefully review the treatment and reporting of fringe benefits, particularly for employees and 2% S corporation shareholders. Due to changes under the CARES Act and COVID-19 relief efforts, several new rules and exceptions apply.

Key Year-End Reminders for Employers

Fringe Benefit Basics

Fringe benefits are generally taxable unless specifically excluded by law. The value of these benefits must be determined before December 31 to ensure proper payroll tax withholding and reporting on Form W-2 or 1099 by January 31, 2021.

Common Employee Fringe Benefits

Group-Term Life Insurance

First $50,000 in coverage is tax-free.
Excess coverage is taxable and must be reported in Boxes 1, 3, 5, and 12 (Code C) on Form W-2.

Business Expense Reimbursements

Non-accountable plan reimbursements are taxable.
Accountable plan reimbursements (with adequate substantiation or per diem rates) are tax-free.

COVID-19 Qualified Disaster Payments (Section 139)

Tax-free payments for unreimbursed COVID-related expenses.
Examples: remote work supplies, child care due to school closures, and additional health costs.
No W-2 or 1099 reporting required.

Employer-Paid Student Loan Assistance (CARES Act)

Up to $5,250 is excludable if provided under a compliant Section 127 educational assistance plan.

PTO Leave Donation

Properly structured leave-sharing plans allow employees to donate unused PTO without tax consequences to the donor.
IRS Notice 2020-46 allows cash donations to COVID-19 charities through PTO conversion to be tax-free to the employee.

Personal Use of Company Vehicles

Taxable as imputed income.
Use special valuation methods and notify employees by January 31.
FICA withholding required, FIT optional.
COVID-related business travel changes may have increased personal use percentages.

Personal Use of Company Aircraft

Value is based on the Standard Industry Fare Level (SIFL) formula.
Imputed income is subject to FICA, FUTA, FITW, and SITW.
Non-business entertainment use may also generate nondeductible expenses for the employer.

De Minimis Fringe Benefits

Small, infrequent benefits can be excluded.
Cash, gift cards, and event tickets are never de minimis.
Frequent or lavish meals may be challenged by the IRS.

Employee Gifts and Awards

Tangible personal property gifts may be excluded if they qualify under length-of-service or safety award rules.
Limits: $400 for nonqualified plans, $1,600 for qualified plans.
Non-cash gifts exceeding $25 are generally taxable.

Moving Expenses

Taxable to employees unless for active-duty military under PCS orders.
Employers may still deduct the expense.

Qualified Transportation Benefits

Monthly tax-free limits for 2020: $270 for parking, $270 for transit/vanpool.
Amounts exceeding these are taxable.
Employer deduction disallowed under current law.

Noncompensatory Cell Phones

Business use of employer-provided devices is tax-free.
Must be provided for business reasons, not as a benefit or bonus.

Special Fringe Benefit Rules for 2% S Corporation Shareholders

Certain fringe benefits that are excludable for regular employees must be included in taxable income for 2% S corporation shareholders. Failure to report them on Form W-2 disallows the corporation’s deduction.

Benefits Included in Wages:

Health, dental, vision, and LTC insurance
Section 127 tuition reimbursement
Health savings account contributions
Disability insurance premiums
Group-term life insurance (entire premium)
Transportation and adoption assistance
Personal use of company assets and meals/lodging

Ineligible for:

Participation in cafeteria plans
Pre-tax reimbursements for health premiums

Fringe Benefits Not Taxable to 2% Shareholders:

Qualified retirement plan contributions
Educational assistance (limited by ownership rules)
Dependent care assistance (with nondiscrimination limits)
Retirement planning services
No-additional-cost services
Qualified employee discounts
Working condition and de minimis fringe benefits
On-site athletic facilities

Final Thoughts

Year-end fringe benefit reporting and compliance require careful planning and documentation. Be sure to:

Review all benefits provided to employees and shareholders.
Ensure taxable benefits are included in W-2 reporting.
Document and comply with the requirements for any exclusions.

If you have questions about the reporting of fringe benefits, proper treatment for S corporation shareholders, or CARES Act provisions, contact your tax advisor to ensure compliance and avoid missed deductions or penalties.